Dutch business dynamics low, productivity growth challenged

Higher productivity growth is essential for the Netherlands due to limited labor supply from population ageing.

However, a De Nederlandsche Bank analysis reveals that low business dynamics are a significant brake on this growth.

The Dutch market sector is characterized by a disproportionately large number of micro-firms; 85% of all firms have no employees, compared to 62% in the EU-27. These firms generally exhibit very little growth and remain active for extended periods, leading to a substantial group of small, low-productivity entities.

This structural pattern results in capital and labor being tied up in less productive uses, hampering the creative destruction process where inefficient activities make way for more productive ones.

Estimates of misallocation indicate that firms are, on average, larger than their productivity warrants, suggesting a lack of scaling down and exit.

The limited business dynamics are mainly driven by micro-firms that rarely scale up after entry.

This structural pattern, which differs from many other European countries, is linked to factors such as the strong services orientation, tax system incentives, and labor market institutions.

Firms that start with employees, however, grow quickly, suggesting the Dutch business climate does not inherently hinder growth.

Crucially, these weaker domestic business dynamics are not accompanied by an increase in firms' market power.

Market concentration and markups have remained relatively stable over the past fifteen years, as entry and exit primarily occur among very small firms.